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Retail Business Environment

Pharmaceutical Sector

Ilma Israr

PGDM-Retail(08)

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Contents

1.Size of the Pharmaceutical Industry2.Structure of the Sector3.Major Players in Pharmaceutical Industry4.Top Five Players in Pharmaceutical Industry5.Methods of Retail in Pharmaceutical Industry6.Distribution Channels in Pharmaceutical Industry

7.Online Pharmacy8.Level of Integration in Pharmaceutical Industry9.Legal Requirement & Taxation in Pharmaceutical Sector10. FDI in Pharmaceutical Sector:11. Problems afflicting Pharmaceutical Industry12. Investments and Environmental changes in Pharmaceutical Sector13. Analysing Pharmaceutical Sector using Porters Five Forces14. Growth of Pharmaceutical Sector and its CSF

15. Bibliography

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ze of the Pharmaceutical Industry

Indian Pharmaceutical industry has become the third largest in world in terms of volume and ranks 14th in terms of

ue at over Rs 1 trillion. It has grown from a humble Rs 1,500-crore (Rs 15-billion) turnover in 1980 to approximately Rs

5.11 billion in 2010-11.The pharmaceuticals industry generally grows at about 1.5-1.6 times the Gross Domestic

duct growth, The domestic pharmaceuticals market in India increases at a compound annual growth rate of 9.9 per

t until 2010 and subsequently at 9.5 per cent till the year 2015.

Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020, according to a report India Pharma 2020:

pelling access and acceptance, realising true potential by McKinsey & Company. The report states that the market has

further potential to reach US$ 70 billion by 2020 in an aggressive growth scenario. Moreover, according to an Ernst &

ng and industry body study, the increasing population of the higher-income group in the country, will open a potential$ 8 billion market for multinational companies selling costly drugs by 2015. The pharmaceutical industry in India is

ong the most highly organized sectors. This industry plays an important role in promoting and sustaining development

he field of global medicine. Due to the presence of low cost manufacturing facilities, educated and skilled manpower

cheap labour force among others, the industry is set to scale new heights in the fields of production, development,

nufacturing and research.

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ructure of the Sector:

rmaceutical retailing is perhaps the next big thing in the retail sector in India. Although the industry still remains largely

rganized with corporate and international brands making an entry into the industry in a big way, pharmaceutical retailing is

sed to become one of the major organized sectors in the country in the coming years. The organized pharmaceuticals retail

stitutes Rs4000 crore in 2010 and is expected to grow at a rate of 20% as the pharmaceuticals industry is expected to grow inps and bounds due to the organized players entry into the market combined with the readiness of consumers to invest in their

lth. There are more than 3,500 organised retail pharmacy outlets in India in 2010. This is expected to grow nearly three times to

000 outlets by end of next year, indicated in the report titled India Retail Research 2009 .

antages to Organised Pharmaceutical Retail Chains:

1. The large players in pharmaceuticals retail sector buy Raw material in bulk quantity, process in bulk quantity, package in biglots, use high technology in processing, packaging and transporting, so they get the finished drugs at the lowest possible

prices.

2. These large players use modern, latest and automated machinery in manufacturing Drugs, in Inventory management, supply

chain management, use of latest display tools, free samples to Doctors and hospitals etc.

3. Retailing their own pharmaceuticals brands/generic brands along with competitors brands helps in promoting their ownbrands/generic brands which can fetch more profits using push strategy through doctors and hospitals by providing free

samples, sponsoring free treatment to patients. With the optimum use of available resources and technology, some priceadvantages can be passed over to patient.

4. According to the latest study it was found that up to 10% discount is offered by retail pharmacy chains like Apollo, Hetero,

Subhiksha and Med Plus to various customers.

advantages to Unorganized Retailers:

1. These small stores buy in small quantities from drug distributors with higher prices with no schemes thereby it reduces profit

margins.

2. These small retail medical shops operate from small lanes and by-lanes where it could cater to limited range of patients who

belong to those surroundings only. This results in lower turnover of sales resulting in lower profit.

3. These small medical shops generally run on low man power or sometimes run as a family business and therefore cannot

effort to hire persons for home delivery of medicines.

4. New formulas are frequently launched into the market and doctors always want to try new formulas on patients thereby

sales of old formulas are slowed down which causes huge quantity of expires of medicines which in turn result in heavy

losses.

5. Small medical shops buy in smaller quantities and cannot avail the advantage of various schemes on quantity purchases,there by their unit purchase prices are higher and cannot offer discount to patients/ customers.

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ajor Players in Pharmaceutical Industry

me of the leading Indian players by sales (US$ million)

Company name Sales in US$ million Year End

Cipla 1033.46 March 2009

Ranbaxy Lab 951.03 December 2009

Dr Reddys Labs 866.44 March 2009

Sun Pharma 805.51 March 2009

LupinLtd 603.99 March 2009

Aurobindo Pharma 582.27 March 2009

Piramal Health 483.10 March 2009

Cadila Health 354.02 March 2009

Matrix Labs 310.06 March 2009Wockhardt 309.68 December 2009

.

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p Five Players in Pharmaceutical Industry:

Ranbaxy:

Ranbaxy is among the predominant pharmaceutical companies in India and was founded in 1961.Ranbaxy is a research

based pharmaceuticals giant and became a public limited company in 1973. Ranbaxy was recently ranked among the top 10

international pharmaceutical companies in the world have presence across 49 countries. Ranbaxy is also reputed for its 11

state-of-the-art manufacturing facilities in countries like China,India, Brazil, South Africa, and Nigeria. The company has also

won several awards and recognitions for its pioneering initiatives in the developing markets of the world.

Ranbaxy is also a member of the Indian Pharmaceutical Alliance and Organization of Pharmaceutical Producers

of India. In the present scenario Ranbaxy commands more than 5% share of the Indian pharmaceutical market. Ranbaxys

product portfolio is diverse and includes drugs that cater to nutrition, infectious diseases, gastro-enteritis, pain

management, cardiovascular ailments, dermatology, and central nervous system related ailments.

Ranbaxys operations in India are designed under as many as 9 SBUs which take care of the various categories of medicines

and drugs that are manufactured by Ranbaxy. The company is especially well-known for having the highest research and

development (R&D) budget among pharmaceuticals companies in the world which is as high as US$ 100 million.

Ranbaxy India operations are handled by 2,500 employees and the companys market share in India is worth around US$6

billion.

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Dr. Reddy's Laboratories:

Dr. Reddy's Laboratories is one of the popular pharmaceutical companies with base in more than

100 countries. The medicines of Dr. Reddy's Laboratories Limited are easily available all across the

globe.It is very much customer friendly. It takes care of the fact that maximum people get benefited by

the products of this pharmaceutical company. It commercialized various treatments so as to provide high

tech treatment to the masses.Though Dr. Reddy's Laboratories is located in various parts of the world, it has its headquarters in India.

The subsidiaries of this company are found at various countries like US, Germany, UK, Russia and Brazil.

16 countries have the representative offices of Dr. Reddy's Laboratories Limited. 21 countries have third

party distribution.

Cipla was founded by Khwaja Abdul Hamied in 1935 and was known as The Chemical,Industrial and

Pharmaceutical Laboratories, though it is better known by the acronym Cipla today. Cipla was registered

in August, 1935 as a public limited enterprise and it began with an authorized capital of Rs. 6 lakh.

Sun Pharmaceuticals was set up in 1983 and the company started off with only 5 products to cure

psychiatric illness. Sun Pharma is known worldwide as the manufacture of specialty Active

Pharmaceuticals Ingredients and formulations.

However, the company is also concerned with chronic treatments such as cardiology, psychiatry,

neurology, gastroenterology, diabetology, and respiratory ailments. Active Pharmaceuticals

Ingredients (API) include peptides, steroids, hormones, and anti-cancer drugs and their quality is

internationally approved. The international offices of Sun Pharmaceuticals Industries Ltd. are located in

British Virgin Islands, Russia, and Bangladesh. In India, the offices are in Vapi, Silvassa, Panoli,Ahmednagar, and Chennai.

Though set up in 1935, it was only in 1937 that Cipla began manufacturing and marketing itspharmaceutical products. Today, the company has its facilities spread across several locations across

India such as Mumbai, Goa and Bangalore.

Apart from its strong presence in the Indian market, Cipla also has an extensive export market and

regularly exports to more than 150 countries in regions such as North America, South American, Asia,

Europe, Middle East, Australia, and Africa. For the year ended 31st March, 2007 Ciplas exports were

worth approximately Rs. 17,500 million. Cipla is also considerably well-known for its technological

innovation and processes for which the company received know-how loyalties to the tune of Rs. 750

million during 2006-07.

Sun Pharmaceuticals:

Cipla

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.

Aurobindo Pharma

Aurobindo Pharma, an India-based private pharmaceutical company having presence around the world. Aurobindo

Pharma was set up in the year 1986 and started its operations in 1988-89 in Pondicherry, India. Now, the company is

headquartered at Hyderabad, India.

Aurobindo Pharma is one of the most respected generic pharmaceuticals and active pharmaceutical ingredients (API)

manufacturing company of the world. Aurobindo Pharma operates in over 100 countries across the world. Further, the

pharmaceutical major markets over 180 APIs and 250 formulations throughout these destinations. This Indian pharmaceut

major has filed over 110 DMFs and 90 ANDAs for the USA market. So far, Aurobindo has received 45 ANDA approvals (bot

and tentative) from USA alone.

Aurobindo Pharma products cover segments like Antibiotics,

Anti-Retro Virals

CVS

CNS

Gastroenterologicals

Anti-Allergics

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Methods of Retail in Pharmaceutical Industry:

The healthcare sector in India is getting much more sophisticated than it was earlier. The services

side of the healthcare industry is growing quite substantially and rapidly. In a sense, pharmaceuticals

retailing is a proxy for the healthcare sector. Therefore, it will grow accordingly. Also, the disease

profile in India is changing from infectious diseases to lifestyle diseases, where you require much

more intensive care. This will entail medication on an ongoing basis, which will in turn make

prescription-based medicine mandatory. In the past if you look at the shelf space, in a pharmacy

store, OTC drugs that were priced at Rs 10-20 used significant space. Now you need tablets and

medicines that are much more expensive for lifestyle diseases. Sales of higher value products are

hence, driving the growth in pharmaceuticals retail. Moreover, life expectancy has increased

considerably resulting in an increase in drug consumption. Furthermore, there is significant

innovation in the industry. More new drugs are coming for many discrete diseases that were not

looked at so far. Overall expenses on drugs have amplified per household as a result of growing

health awareness.

Retail pharmaceutical sector in India is highly fragmented, and the unorganized channel

ofpharmaceuticals currently dominates this space commanding over 97% of the total market share

The total retail pharmacy market has been growing at an average of 18% per annum over the lastfew years, and is anticipated to grow by even higher numbers in the future. Organized retail

pharmacy however, as a subset, has been growing at an average of 25%, and is expected to grow

between 35 40% in this next decade .The sector currently has nearly 15 layers serving through an

aggregate of 2000 stores across the country Both, the number of players and the total stores

in operations shall increase with the increase in investments in this sector Analysts consensus

suggests the retail pharmaceuticals sector would witness investments in excess of USD one billion

over the next few years .High margins of 25-35% make the retail pharmacy a very lucrative business

in India With increasing consciousness and disposable incomes, the organized pharmacy business

shall experience plenty of opportunities for growth.Major Players in Retail Pharmaceutical:Some of the retail majors who have successfully ventured in this segment are Apollo Pharmacies,

Himalaya Drugs, The Medicine Shoppe, Trust Chemists and Druggists, Guardian Lifecare, Manipal

Cure & Care, CRS Health, 98.4 degrees etc.

APOLLO PHARMACY:

A Division of the Apollo Hospitals enterprisesAsias largest healthcare Group Indias first and

largest branded pharmacy network Over 1000 stores serving 24 hours daily Operating in 17 states

across India Provides genuine medicines from leading manufacturers Pharmacy outlets manned by

qualified and trained pharmacist.Value added services include personalized pharmacy refilling

services ,Free health camps, Toll free Helpline services, Free health insurance on purchases over INR6000 in a year Health newsletters 24 hours store operations .

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GUARDIAN PHARMACY :A Six year old retail chain in India offering Pharmacy, Wellness, Health and Beauty products

Currently serves through 230 outlets Aims to have 400 operational stores by 2012 Has presence in

26 cities, spread across North, East and West India Stores have an international look and feel Stores

managed by professionally trained pharmacist. Advisory services on drugs and their usage Maintain

record of customers medicine requirements Guardian Xtravalu cards: Help earn points every time a

customer shops Monthly health magazine: Guardian Health Chronicle Senior citizen discounts: 10%

discount on medicines and an additional 1% discount on prescription medicines .Free health Check

up camps. Community service: Provide cut strips of medicines to NGOs. Tie ups with individuals

Corporates retailers.Store format is High Street stores Malls Neighborhood stores .

HEALTH & GLOW :A Joint venture in India between Dairy Farm International holdings ltd of Hong Kong and Arko ltd

Headquartered in Bangalore Largest organized health and wellness player in South India currently

has 65 operational stores across four cities Bangalore, Hyderabad, Chennai and Mumbai Aims to

have over 200 stores operational in the near future . It has Drug advisory services of International

ambience with well qualified & trained staff for specialist care .Home Delivery Gift coupons and tie

ups with individuals Corporate Retailers . Store format is Express stores Concept stores Malls

Hypermarkets Supermarkets.

RELIGARE WELLNESS:

A Part of the Religare group, which amongst other business interests carries the Fortis brand

Pioneering endeavor within Indias healthcare industry putting health solutions on the retail map.Incorporates setting up of a Pan India World Class Retail Network of health stores that would

provide comprehensive solutions under one roof Hopes to have a chain of

1000 complete health stores all across India covering 400 cities by 2012 Stores managed by

professionally trained employees Value added services include Supplement advisory Ayurveda &

Homeopathy advisory Customer loyalty programs: points on purchase Free Home delivery and 24

hours operational stores.

MEDPLUS

Established in the year 2006 with the aim of eliminating the risk of consumers purchasing fake drugs

Presently serves through over 800 pharmacy stores in five states covering 98 cities and towns in

Andhra Pradesh, Maharashtra, West Bengal, Karnataka, and Tamil Nadu Owns Indias first exclusivehospital pharmacy chain RiteCure Launched state-of-the-art diagnostic lab services which can aid

in the prevention, detection, or management of a wide range of illnesses Guided by three themes -

quality, convenience, and low prices Market share.

HIMALAYA HEALTHCARE

A Part of the Himalaya drug company that was founded in 1930 Specializes in extending only

Ayurvedic products to consumers Serving across 71 countries Converted Ayurvedas herbal tradition

into a complete range of proprietary formulations dedicated to healthy living and longevity .

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Distribution Channels in Pharmaceutical Industry

Drug distribution in India has witnessed a paradigm shift. Before 1990, pharmaceutical companies

used a different distribution system, in which they established their own depots and warehouses

that now have been replaced by clearing and forwarding agents (CFAs). These organizations are partof the distribution chain, and are primarily responsible for maintaining storage (stock) of the

company's products and forwarding SKUs to the stockist on request. Most companies keep one to

three CFAs in each Indian state. On an average, a company may work with a total of 2535 CFAs.

Unlike a CFA that can handle the stock of one company, a stockist (a regional distributor) can

simultaneously handle more than one company (usually, 515 depending on the city area), and may

go up to even 3050 different manufacturers.

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Figure 1 show how a manufactured product passes through the company-owned central warehouse,

which supplies it to the CFA or super stockist. From the CFA the stocks are supplied either to the

stockist, substockist, or hospitals. The retail pharmacy obtains products from the stockist or

substockist through whom it finally reaches the consumers (patients). Certain small manufacturers

directly supply the drugs to the super stockist.The prices and the margins of drugs for the wholesaler

and retailers are largely decided by the National Pharmaceutical Pricing Authority (NPPA), which

varies depending on whether the active constituent of the product is a scheduled drug or a

nonscheduled drug. Scheduled drugs are price-controlled whereas nonscheduled drugs are not. The

NPPA is an organization of the government of India established to fix or revise prices of controlled

bulk drugs and formulations. Companies must keep drug prices affordable to the general public. To

keep medicines within reach of the poor population, the government has covered 76 scheduleddrugs.

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Online Pharmacy:

Online pharmacies have been a preferred channel of purchasing medicines in most European

countries but India is still taking baby steps in this retail mode. However, it comes as no surprise that

online pharmacy players are looking to expand their presence in the Indian market, as Indian

consumers already have access to much cheaper generic medicines available here.

In India a limited numbers of online pharmacies are operational through different channels. For e.g.

Apollo Pharmacy has installed fax machines in clinics of doctors, from where prescriptions are faxed

to Apollo stores, which then deliver the medicines to customers at the desired location. Lifeken

(Religare Wellness) has a feature to post the requirement of drugs on the website, based on which

medicines are dispensed at the desired location. Typical online pharmacies such as in.keegy.com,

realpharma.com, chennaiclassic.com, worldwide online pharmacy. B-2-B online pharmacies whichcater to other online pharmacies abroad make up the third channel.

Online pharmacies could have been a welcome change in the drug distribution system however;

invasion of this system by illegal operators has put safety of the consumer/purchaser at stake. The

consumer is handicapped in a sense that he has no source to check the reliability of his service

provider. In recent times there have been a number of changes to the online pharmacy scene which

has been complicated by the large number of illegal sites that have mushroomed. Many of them

remain functional for just a few weeks to a few months and then are shut down and restarted under

different names.

Many online pharmacies do not have adequate checks in place and end up selling harmful

prescription drugs to underage people. Some pharmacies actually promote themselves as 'no

prescription required' pharmacies and induce consumers to buy counterfeit or spurious medicines.Due to the poor regulatory framework and inadequate implementation of rules in India, nearly 20

percent of the global burden of illegal online pharmacies is based in India. Unfortunately, as of now,

in India, the drawbacks of online pharmacies overshadow their benefits. The lack of separate

regulations is a serious lacuna.

If contained within regulations and laws, online pharmacy will prove a very good concept .In fact if

regulators are vigilant and if adequate checks are in place, legal full service online pharmacies that

operate within domestic markets can help ensure that patients refill their prescriptions and hence

improve compliance rates and will serve patients and customer in the right sense.

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Level of Intergration in Pharmaceutical Industry :

In pharmaceuticals industry the backward integration covers research and development (R and D)

and Active Pharmaceutical Ingredients (API) part while the forward integration includes logistic

support, marketing and country brand.

Companies like Wockhardt and Ranbaxy are e.g. where pharmaceuticals and healthcare are

converged.It is a forward integration from the pharmaceuticals company's side and a backward

integration from the hospital's side. In Wockhardt most of the drug requirement is met by the

pharma arm, which is given the first prescription. Similar is the case of Ranbaxy and Fortis

Hospitals.Also the two coming close will provide the pharmaceuticals companies with a ready

database of patients to conduct clinical trials, a research site, and access to a vast population, hence

an expansion strategy for them.

There are three things which can be achieved through this, one is the research and

development.Second they will have access to huge clinical data and the other is clinical research and

third is forward integration through which they will be able to sell all your medication.

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Legal Requirement & Taxation in Pharmaceutical Sector:

Customs duty consists of Basic Customs Duty (BCD)-12.5 percent, additional duty of customs under

section 3(1) ('CVD')-16.32 percent and additional duty of customs under section 3(5) (ADC)-four

percent. Further, education cess at two percentages is also levied on aggregate of customs duty. The

above aggregates to an effective rate of customs duty of 36.74 percent.

Drugs and medicines are subject to excise duty on the basis of the Maximum Retail Price (MRP)

printed on the package with an abatement of 40 percent of MRP.

VAT/CST is levied on sale of movable goods in India. Drugs and medicines are taxed at four percent

except Assam where the rate is six percent. Although, it was expected that VAT would bring in

uniformity in classification of products, descriptions in the tariff schedule varies from state to state.

For example, medical devices are taxed at 12.5 percent in three states, whereas in all other states,

the tax rate is four percent.

CST rate is four percent against furnishing of prescribed declarations. Otherwise, the rate of tax is 10

percent or the VAT rate prevailing in the originating state, whichever is higher.

The multistage taxation in the pharmaceutical industry i.e. Customs duty on imports, Central excise

duty on manufacture, Central Sales Tax (CST) / Value Added Tax (VAT) on sale of goods, Service taxon provision of services and levies such as entry tax, octroi, cess by the State or local municipal

corporations/municipalities is one of the key stumbling block in its progress. A tax law, devoid of

multiple taxes and manifold compliance requirements and also enabling seamless credit mechanism,

has been the dream of the industry for long.

Introduction of GST (Goods and Services Tax) will be positive step and if implemented in the right

spirit could result in reduction in transaction cost. The most visible and immediate impact of GST

appears to be the proposed discontinuance of (Central Sales Tax (CST) levy. As on date, CST is a cost

to pharmaceutical manufacturers whenever they procure raw materials from outside their stateand if sale is on inter-state basis. Though, over the last couple of years CST rates have reduced from

four to two percent, the said levy continues to be a cost to the manufacturers and traders dealing ininterstate transactions. The phasing out of CST with the advent of GST could do away with the

perennial issue of credit leakage on this front.

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Following are the laws governing the pharmaceutical sector:

1. The Drugs and Cosmetics Act 1940:The object of the Act is to regulate the import, manufacture, distribution and sale of drugs.

Under the provisions of this Act, the Central Government appoints the Drugs Technical

Advisory Board to advise the Central Government and the State Governments on technical

matters arising out of the administration of this Act. The board can constitute

subcommittees for the consideration of a particular matter.

2. The Narcotic Drugs and Psychotropic Substances Act, 1985:This is an Act to consolidate and amend the law relating to Narcotic Drugs, to make stringent

provisions for the control and regulation of operations relating to Narcotic Drugs and

Psychotropic Substances and for matters connected therewith.3. The Pharmacy Act 1948:

The Pharmacy Act was passed in 1948 and was amended in 1959, 1976 and 1984.The aim of

this law is to regulate the profession of Pharmacy in India.Under the provisions of this act

the Central Government constitutes a Central Pharmacy Council of India

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FDI in Pharmaceutical Sector:

The government of India has allowed foreign direct investment up to 100% through the automatic

route in the drugs and pharmaceuticals industry of the country, on the condition, that the activity

should not fall into the categories that require licensing. The increase in FDI Inflows to Drugs and

Pharmaceuticals industry in India has helped in the expansion, growth, and development of the

industry. This in its turn has led to the improvement in the quality of the products from the drugs

and pharmaceuticals industry.

However recently the commerce ministry has sought a review of foreign direct investment policy in

the pharmaceutical sector, limiting the amount of FDI into the sector to 49 percent in the light of

recent takeovers of domestic companies by multinationals.Acquisition of Indian pharmaceutical

companies by multinationals could orient them away from the Indian market, thus reducing thedomestic availability of drugs produced by them.Such takeovers could weaken competition resulting

in higher prices of domestic drugs and may lead to just a clutch of companies dictating prices of

drugs which are critical for addressing public health concerns.

The concept of organised pharmaceutical retail started to make its presence felt in India only

during the last few years. Even though FDI in the pharmaceutical retail trade segment is banned inIndia, the organised retail chains are bringing in international best practices into their operations.

Although, international pharmacy chains have still not established a major presence in the country,

the Indian Government has taken tentative steps towards achieving the ultimate goal of allowing

100 percent FDI in retailing by permitting single-brand stores to set up shop here, paving the way for

entry.

The absence of FDI has also resulted in organised retail operations of large local business houses to

expand, and MNCs are finding backdoor entries to the country by forming alliances with local

business houses. So through such alliances locally-owned retail chains are rapidly expanding

throughout the length and breadth of the country and this has enabled R&D in this field.

There may be various reasons for restricting FDI in this segment, which also includes limited

investment capabilities and stringent regulatory environment. A great deal of concern has been

expressed at various forums that globalisation will wipe out traditional outlets. This concern is more

of an emotional outburst rather than a reality. Look at the vastness of the country in terms of

geography and population. Traditional outlets will continue, but such outlets in order to survivemust change for the better.

.

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Problems afflicting Pharmaceutical Industry:

The treat of counterfeit drugs entering the marketplace is greater than ever before and so is

the risk of pilferage. Clinical effectiveness of medical reps is a challenge and so are qualified professionals. Domestic market price controls on several drugs, drug prices in India are already amongst

the lowest in the world

Continuous rise in R&D expenditure puts pressure on the industry to increase productivity.

Dominating generic drugs: Indian companies are more focused on generics whereas branded

drugs market is yet to be fully captured

Strong pricing competition among local manufacturers has led to low margins .

Problems related to frequent power cuts and a lack of proper transport infrastructure will

slow the growth of the pharmaceutical industry, while limited funding from financial

institutions, venture capitalists and the government may restrict the development of the

sector.

High clinical development costs coupled with declining drug discovery success rates are

causing productivity levels to fall in the global pharmaceuticals industry.

The imminent patent expiry of several major blockbuster drugs and the related rise of

cheaper generic alternatives is further exacerbating the situation.

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Investments and Environmental changes in PharmaceuticalSector:

The healthcare sector has attracted growing investor support in 2010 with nearly a tenth of

the total private equity funding going to this sector.The pharmaceutical, healthcare and

biotech sector witnessed five merger and acquisition transactions (M&A) worth US$ 250

million recently.

The drugs and pharmaceuticals sector has attracted FDI worth US$ 1,825.43 million between

2000 and September 2010.The Government plans to set up a US$ 639.56 million venture

capital (VC) fund to give a boost to drug discovery and strengthen the pharmaceutical

infrastructure. Private equity major Sequoia Capital has made its first investment in the pharmaceutical

sector in the country by investing US$ 15.86 million into Celon Labs, which will use the funds

to double its manufacturing facility.

Swiss Pharma major Lonza AG, would invest around US$ 55.33 million through its Indiansubsidiary in a phased manner in Genome Valley project, Hyderabad.

Hyderabad Menzies Air Cargo Private Limited, a joint venture between GMR Hyderabad

International Airport Limited (GHIAL) and Menzies Aviation, has launched India's first

airport-based pharmaceutical zone, dedicated pharmaceutical cargo storage and handling

facility, at Hyderabad. The project involved an investment of US$ 1.22 million.

Belgium based Helvoet Pharma, part of the Daetwyler Group is setting up its first greenfield

production facility.

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Analysing Pharmaceutical Sector using Porters Five Forces:

Industry Competition:

Pharmaceutical industry is one of the most competitive industries in the country with as many as10,000 different players fighting for the same pie. The concentration ratio for this industry is very

low. High growth prospects make it attractive for new players to enter in the industry.

Another major factor that adds to the industry rivalry is the fact that the entry barriers to

pharmaceutical industry are very low. The fixed cost requirement is low but the need for working

capital is high.

The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger

companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher.

Many smaller players that are focused on a particular region, have a better hang of the distributionchannel, making it easier to succeed, albeit in a limited way. An important fact is that

pharmaceutical is a stable market and its growth rate generally tracks the economic growth of the

country.

The product differentiation is one key factor, which gives competitive advantage to the firms in any

industry. However, in pharmaceutical industry product differentiation is not possible since India

has followed process patents till date, with laws favouring imitators. Consequently, product

differentiation is not the driver, cost competitiveness is.

Bargaining power of buyers:

The unique feature ofpharmaceutical industry is that the end user of the product is different from

the influencer (read doctor). The consumer has no choice but to buy what doctor says. However,

when we look at the buyer's power, we look at the influence they have on the prices of the product.

In pharmaceutical industry, the buyers are scattered and they as such does not wield much power

in the pricing of the products. However, government with its policies, plays an important role in

regulating pricing through the NPPA (National Pharmaceutical Pricing Authority).

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Bargaining power of suppliers:

The pharmaceutical industry depends upon several organic chemicals. The chemical industry is

again very competitive and fragmented. The chemicals used in the pharmaceutical industry are

largely a commodity.

The suppliers have very low bargaining power and the companies in the pharmaceutical industry

can switch from their suppliers without incurring a very high cost. However, what can happen is that

the supplier can go for forward integration to become a pharmaceutical company.

Barriers to entry:

Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur in India.

The capital requirement for the industry is very low, creating a regional distribution network is easy,

since the point of sales is restricted in this industry in India.

However, creating brand awareness and franchisee amongst doctors is the key for long-term

survival. Also, quality regulations by the government may put some hindrance for establishing new

manufacturing operations.

Going forward, the impending new patent regime will raise the barriers to entry. But it is unlikely to

discourage new entrants, as market for generics will be very huge.

Threat of substitutes:

Three major types of substitutes influence the ethical pharmaceutical industry: alternative

therapies, the health consciousness of the customer and generics(substitute for original brands).

Whatever happens, demand for pharmaceutical products continues and the industry thrives.

However, in recent times, the advances made in the field of biotechnology, can prove to be a threat

to the synthetic pharmaceutical industry.

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Growth of Pharmaceutical Sector and its CSF:

Domestic pharmaceutical market is likely to reach US$ 20 billion by 2015.The key factors that willpropel the growth of the market are changing population dynamics, high disease prevalence,

increased access to health care, and increased affordability. These drivers have been explained

below.

Change in Demographics and disease pattern:

The age structure of the Indian population has been changing favourably for the growth of the

pharmaceutical industry. In 2001, the share of the population between the age group of 15-64

years was approximately 62 percent. The figure is likely to be approximately 66 percent in 2011. This

is the age-group that is more prone to diseases and has greater affordability (as it is the working

population).

Disease profile of the market is changing from acute illnesses to chronic ailments. As per WHO, India

will account for 60 percent of world's cardiac patients by 2010. Rising income levels and changing

lifestyle patterns are causing a shift from infectious diseases to lifestyle related diseases and the

prevalence of lifestyle diseases is rapidly increasing. Cardiovascular disorders, asthma, diabetes and

cancer have become the top segments in lifestyle diseases in India and are expected to represent

nearly 50 percent of total healthcare expenditure.

Increased access to healthcare:

Thanks to various public and private initiatives, the accessibility of healthcare has increased

considerably in the rural areas. Central as well as state governments have designed and deployed

several health related initiatives, which have taken health benefits at the doorstep of people residing

in far-flung areas. The initiatives have also led to the increase in the number of healthcare facilities

in rural areas. Increased government spending on infrastructure (roads, telecom etc) has

encouraged pharmaceutical companies to take their offerings to the distant interiors of India.

Increased affordability:

Increasing population and rise in personal disposable income indicates significant potential for

healthcare services in India.Over the past 10 years, the proportion of households in lower middle,

middle and high income groups has risen significantly and currently forms over 75 percent of total

households. The growing affluence of the 300 million strong middle income consumers is creating

greater demand for healthcare as rising purchasing power is causing a shift in needs from basic

needs to healthcare and education related needs.Moreover, due to the government sponsored

health insurance schemes like Rashtriya Swasthya Bima Yojana and Rajiv Arogyasri, the financially

backward and Below Poverty Line (BPL) families now have access to healthcare services and drugs.

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Increase in revenues from services:

The revenues from the service segment are likely to increase rapidly due to the increase in

outsourcing of contract research and manufacturing services (CRAMS) to India. The Indian clinical

trials market is forecasted to grow at a CAGR of approximately 30 percent over the next few years,

at almost double the global average. The contract manufacturing market in India is valued at $1.1

billion; and India's share of the global contract manufacturing market is likely to increase from 2.8

percent in 2007 to 5.5 percent in 2010.

Changing mix of distribution channels

There are around 500,000 retail pharmacies in India and most pharmacies are individual privately

owned entities. The scenario is changing as the traditional round-the-corner pharmacy stores areincreasingly being replaced by large corporate pharmacy chains like Apollo, Medplus, Medicine

Shoppe, Health & Glow etc. Most of the pharmacy chains have the backing of large corporate houses

and thus have the financial might and resources to play at the top level. Most of the pharmacy

chains have plans to increase their presence and reach in 2011.

Health insurance

The health insurance market is growing at an exceptional rate and it is the fastest growing segment

in the non-life insurance industry in India. Several factors like growing awareness, higher disposable

income, government initiatives, rising healthcare costs are driving the growth of health insurance in

India.In the future the health insurance market is likely to get impetus through the entrance offoreign players (health insurers). Industry experts suggest that there are around 50 health insurers

that are contemplating entry in the Indian market. The entrance of foreign players will increase the

competition and should result in increased penetration. Higher penetration of health insurance will

be favourable for the pharmaceutical industry.

Niche Markets:

Specialty care markets (Eg: oncology, immunology) are likely to become more attractive since they

have the greatest unmet needs and R&D efforts, particularly through the biotech stream, are likely

to be more productive in these areas

Indias pharmaceutical market has grown reasonable pace during the past decade. Themarket has the potential to transform itself over the next 10 years and play a crucial role in

countering the growth burden of disease, this depend on three vital conditions. Firstly that India

maintains a relatively high rate of growth of 7 to 8 percent. Secondly the public and private sectors

continue to invest in the development of healthcare-related infrastructure and creating a thriving

labour market and lastly the international pharmaceutical industry finding great opportunities in

India. Thus the process of consolidation, which has become a generalized phenomenon in the world

pharmaceutical industry, continue increasing in India.

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Bibliography

http://www.mckinsey.com

http://www.cci.in/

www.expresspharmaonline.com

http://www.slideshare.net/

http://knowledge/webopac/

http://site.securities.com/ch.html?pc=IN

http://www.ey.com/

Retail BIZ January 2011

Retailers Starting Pharmacy Chains

http://www.mckinsey.com/http://www.cci.in/http://www.expresspharmaonline.com/http://www.expresspharmaonline.com/http://www.expresspharmaonline.com/http://www.slideshare.net/http://knowledge/webopac/http://site.securities.com/ch.html?pc=INhttp://www.ey.com/http://www.ey.com/http://site.securities.com/ch.html?pc=INhttp://knowledge/webopac/http://www.slideshare.net/http://www.expresspharmaonline.com/http://www.cci.in/http://www.mckinsey.com/